Rounding out the major actions that will be voted on later this month at the Open Meeting, the FCC released a draft item that would offer regulatory relief to rate-of-return carriers providing Business Data Services (“BDS”). The proposed items are sure to impact every sector of the communications industry, from the largest wireless carriers to the smallest broadband providers and device manufacturers to business, industrial, and public safety radio users, while potentially transforming large-scale data transport services.

Enabling Unlicensed Use of the 6 GHz Band: The FCC has long been pressed to expand unlicensed use of the 6 GHz Band. It now seems poised to commence a rulemaking to consider just that, while ensuring incumbent licensees are protected. The draft proposed rulemaking would allow unlicensed devices to operate in the 6 GHz Band, subject to certain restrictions that vary depending on the specific frequencies used. The FCC proposes that devices using the 5.925-6.425 GHz and 6.525-6.875 GHz sub-bands would only be allowed to transmit if an automated frequency control (“AFC”) system determines that such use will not cause harmful interference. The FCC noted that these sub-bands currently are occupied by licensees operating point-to-point microwave links and some satellite systems. Meanwhile, devices using the 6.425-6.525 GHz and 6.875-7.125 GHz sub-bands would only be allowed to operate indoors and at lower power levels, but use of these frequencies would not depend on an AFC system. The FCC asserted that these sub-bands are used for mobile and satellite services whose itinerant operations make the use of an AFC system impracticable, while the proposed operating restrictions would seem to offer sufficient protection to incumbents.

Reforming the 3.5 GHz Band Rules: Major wireless carriers have peppered the FCC for almost two years with proposed changes to the geographic license areas for PALs, favoring auctions over larger geographic areas, with longer license periods and expectations of renewal. Smaller providers have supported retaining the smaller census tract licenses adopted in the original PAL framework several years ago. The FCC draft order contains a compromise approach that would issue PALs across the country at the county level. The FCC also would increase the license term for PALs from three years to ten years and make PALs renewable in order to foster long-term investment. Moreover, the FCC would seek to promote greater spectrum utilization through the enhancement of secondary markets in PALs by permitting partitioning and disaggregation of the licenses.

Expanding PLMR Operations in the 800 MHz Band: The FCC has worked for years to increase the efficiency of PLMR operations in the 800 MHz Band. A draft order would, among other things, add 318 new “interstitial” PLMR channels in the 800 MHz Band and terminate a freeze put in place in 1995 that prevented PLMR licensees from gaining access to other license category pool frequencies the 800 MHz Band without a waiver. The FCC also would extend conditional licensing authority above 470 MHz to PLMR stations that operate in the 800 MHz Band and the 700 MHz narrowband, allowing entities to operate for up to 180 days while their applications remain pending. In addition, other changes included in the draft include making new channels available in the 450-470 MHz band for industrial/business radio use in gaps located between PLMR spectrum and other services.

Restructuring Rate-of-Return BDS: The FCC took action in 2017 to deregulate most BDS, which provide dedicated point-to-point transmissions at guaranteed speeds over high-capacity data connections for major businesses, governments, and other large institutions. Under the draft order and proposed rulemaking, certain small rural carriers would be allowed to move from longstanding rate-of-return regulation to “incentive” price cap regulation for some of their BDS offerings. Critically, the FCC would not require these carriers to comply with tariffing, cost assignment, and jurisdictional separations requirements. The draft item would also seek comment on the appropriate regulatory treatment for these carriers’ other transport services, including the need for price controls.

Nearly a year after it ordered sweeping deregulation of the business data services (“BDS”) market, the Federal Communications Commission (“FCC”) proposed new rules that would allow certain small rural carriers to move from longstanding rate-of-return regulation to price cap regulation for their BDS offerings. The transition would reduce the regulatory obligations of such carriers, including the need to prepare and file complex cost studies, which the FCC stated would allow carriers to rededicate resources to building and maintaining networks in underserved areas. The FCC also proposed removing pricing restrictions on lower-speed BDS offerings in areas with sufficient competition and sought input on whether pricing restrictions for higher-speed DBS offerings also should be eliminated.

Unlike prior BDS actions, where the issue was hotly contested for years and deregulation passed on a party-line vote, the proposed rulemaking was supported by all five Commissioners, at least for purposes of gathering a record. It’s not clear if this unanimity will hold throughout the proceeding, but the FCC may be on the verge of turning a page in its focus on these services, which are a bedrock for both retail offerings and for competitive carriers extending their networks.

BDS are dedicated point-to-point transmissions at guaranteed speeds over high-capacity connections used by major businesses, governments, and other large institutions to move their data. Last year, the FCC generally deregulated BDS and eliminated price controls in areas that satisfied a new competitive market test. However, these actions did not extend to the more than 200 smaller carriers predominately located in rural areas that received universal service funding under the Alternative Connect America Model (“A-CAM”). A-CAM carriers previously operated under rate-of-return regulation, where they reported costs annually to the FCC and received a specified return based on those costs. This system required the carriers to prepare and submit complex cost studies to the FCC to justify their returns. However, these carriers elected in 2016 to move to price cap regulation under the A-CAM, which sets the price that the carriers can charge for services. With a cap on prices, the A-CAM carriers possessed strong incentives to become more efficient and reduce costs to increase profits. However, the price cap regulation of A-CAM carriers did not cover their BDS offerings and these carriers continued to be obligated to conduct cost studies for BDS.

The FCC’s proposed rules eliminate this disparity and take additional steps to lessen the regulatory oversight of A-CAM carriers and other BDS providers:

First, the FCC proposed allowing all A-CAM carriers to move their BDS offerings to price cap incentive-based regulation, creating regulatory uniformity among their services and eliminating the time and resources spent on annual cost studies. The FCC proposed that carriers would move to incentive regulation at the holding company level in all states where they receive A-CAM support. Under the proposal, the election would take effect on the July 1st following the FCC’s adoption of a final order setting out the incentive regulation transition rules. As a result, it is likely that the move to incentive regulation may not take place until next year. The FCC intends to use A-CAM carriers’ current rates and demand levels as the basis for the initial DBS rates under incentive regulation, but sought comment on alternative price-setting methodologies.

Second, the FCC proposed eliminating price restrictions for lower-speed DBS offerings in areas with sufficient competition. As with its BDS reforms last year, the FCC plans to adopt a competitive market test that dictates, on a county-by-county basis, whether a carrier will still be subject to price cap restrictions and tariffing obligations. The FCC sought comment on the specifics of the competitive market test and asked whether it should apply the two-pronged test it adopted last year, which looked at whether 50 percent of the locations with BDS demand in a county were within a half mile of a location served by a competing provider or, alternatively, whether a cable provider offered sufficiently fast broadband service in 75 percent of the census blocks in the county. The competitive market test adopted last year drew considerable fire from critics alleging that it deregulated BDS offerings in areas lacking meaningful consumer choice. These concerns certainly will be raised again, especially because the A-CAM carriers generally serve rural areas with limited competition. The FCC also asked whether it should remove pricing restrictions from higher speed BDS offerings and whether it should allow other carriers still operating under rate-of-return regulation to move their services to incentive regulation.

The FCC requested input on how to best transition A-CAM carriers to incentive regulation and ensure consumers do not see a flash cut to increased prices. Specifically, the FCC proposed a three-year transition period during which carriers may (but are not required to) de-tariff their BDS offerings, a six-month freeze of tariffed rates in areas newly deregulated under the competitive market test, and a grandfathering of existing contractual or other long-term BDS arrangements. Consequently, the FCC’s proposed rules mark just the first step in what potentially will be a years-long transition of the BDS offerings of A-CAM carriers.

Comments on the FCC’s planned BDS reforms will be due 30 days after publication of the proposed rulemaking in the Federal Register, with reply comments due 45 days after the proposed rulemaking’s publication.

Enterprises, non-profits, and government organizations use BDS for secure and reliable data transfers, as a means of connecting to the Internet and cloud services, and for private or virtual private networks. The Commission historically referred to the relevant market for such services as the “special access” market, although its definition of BDS is broader than that historical term.

The core theory underpinning the Order is that, by eliminating price cap regulations in counties with actual or potential competition that the Commission deems “sufficient” (based on criteria related to the frequent presence of “nearby” competitors to incumbents within a county or of facilities-based cable operators providing BDS within the county), the FCC will bolster the incentives of facilities-based providers to invest in the expansion and improvement of their BDS offerings.

In defining the scope of the BDS product market, the FCC assessed which services are sufficiently similar to qualify as substitutes for one another, focusing especially on differences in price, quality, and service capability. The Commission examined circuit-based BDS, packet-based BDS, Ethernet over Hybrid-Fiber Coax, “best-efforts” Internet access services, unbundled network elements, dark fiber, satellite services, and fixed wireless services. The Commission also defined the relevant geographic market as being a distance of one mile. After examining a number of factors relating to market entry, the Commission:

• Removed price cap or any other type of pricing regulation on packet-switched BDS and also on TDM-based BDS providing services in excess of DS3 bandwidth levels;
• Removed price cap or other type of pricing regulation on transport services;
• Adopted a competitive market test that dictates on a county-by-county basis whether it will retain price cap regulation for incumbent DS1 and DS3 end user channel termination services in counties deemed non-competitive, subject to review of non-competitive counties after a three-year period. That test adopted is whether 50 percent of the locations with BDS demand in the county are within a half mile of a location served by a competing provider or, alternatively, 75 percent of the census blocks in the county have a cable provider present;
• Declined to adopt ex ante price regulation for wholesale BDS (no general pricing rules for wholesale service or mandates about the relative prices of wholesale and retail BDS);
• Eliminated permissive detariffing of BDS by competitive carriers and after a six-month transition, eliminates mandatory tariffing for incumbent providers for BDS in competitive counties; after a 36-month transition period that commences on the effective date of the BDS Order (60 days after publication in the Federal Register) during which tariffing will be permissive for incumbents;
• Refrained from adopting ex ante pricing regulations for the relationship between wholesale and retail rates for BDS;
• Clarified the continued applicability of Sections 201 and 202 to BDS services, and the availability of Section 208 complaints as a primary enforcement mechanism to ensure BDS rates are just, reasonable, and not unreasonably discriminatory; and
• Clarified that BDS is not inherently a common carrier service and specifically found that select competitive BDS offerings constitute private carriage offerings.

In our companion client advisory, we summarize the primary findings and rules of the Report & Order in greater depth.